Competition! The Secret Weapon for Emissions Reduction

At the risk of making him a target for criticism, the electric power industry has a friend in Jim Markowsky, Assistant Secretary of Energy for Fossil Energy and formerly of AEP. As Wayne Barber of SNL reported recently, Markowsky told the National Coal Council the Administration might relax the New Source Review standards for coal fired power plants in situations where doing so could increase plant efficiency and produce lower overall CO2 emissions.

How logical!

Back in 2005, when I was president at Global Energy Advisors we did a study of the changes in performance at power plants, mostly coal plants and nuclear plants, that were divested by investor owned utilities who believed these old ‘dogs’ could not perform as well as newer, cleaner gas fired combined cycle generation. A funny thing happened when the new owners moved in, they fixed up the place and both the nukes and the coal plants turned from dogs to ‘gems’ with dramatic improvement in both capacity factors and performance. The result was lower costs, lower emissions and better revenue for the merchant generator owners.

Back then only about one-third of coal plants had scrubbers. Today about half the fleet has SO2 scrubbers and that investment may be the trigger for relaxing the NSR standards by USEPA. Markowsky said that increasing the efficiency at existing coal plants by 2% would lower CO2 emissions by about 5% mostly from burning less coal.

New Source Gotcha!

New Source Review, NSR, was added to the Clean Air Act to force utilities to go through an onerous environmental permitting process before they could make improvements at existing coal plants. New source review was a tactic by Northeastern states concerned about acid rain to force the Midwest utilities especially American Electric Power to clean up their emissions from their coal plants. The goal was to discourage re-investment in coal especially where SO2 emissions were problems.

Competition will Reduce Emissions Faster and Cheaper

The problem with NSR is that it actually discouraged cleaning up older plants even though the evidence suggested that wholesale power generation competition in the late 1990’s turned these tactics on their head. Instead of complaining about coal fired generation from the Midwest, the northeastern states clamored to gain access to that same lower cost power when the PJM and MISO markets more effectively integrated. The work we did at Global Energy Decisions analyzing this transformation in the report “Putting Wholesale Competition to the Test”[1] clearly showed that older coal plants, even the worst performers, could be turned into much cleaner, much more efficient and much more profitable power generators with such investments.

“Competitive market forces have changed the way existing power plants are operated, producing substantial improvements in efficiency and cost savings,” we said in the 2005 study which could the following efficiency gains:

14% lower coal plant operating & maintenance costs;

16% improvement in coal plant capacity factors from 1995-2004, enough additional energy to supply near 25 million residential households; and

4% improvement in coal plants heat rates since 1999.

So What?

Well, for one thing, power consumers not only got lower emissions as a result of competitive wholesale power generation but they saved more than $15 billion in utility bills—not a bad outcome from cleaning up your act!

Now concerns over climate change have resulted in pressure to reduce greenhouse gas emissions even more. It is going to take a lot of money to perfect carbon capture and sequestration—and more time to transform the coal industry. The lessons learned a decade ago are still true today. Competition has a wonderful way of concentrating the mind of market participants who seek profits and market share. If they can do well by doing good it is a bonus.

Meanwhile, Markowsky knows that the existing coal fired generation installed base is not going away. If the Administration can reduce emissions from coal by encouraging investment in the best performing plants and discourage the dirtiest plants it creates movement toward its long term objective of replacing the coal fleet with cleaner resources without undermining the reliability of the power supply system.

Instead of the command and control endangement findings, a better strategy just might be to unleash the forces of greed and competition to achieve the Administration’s goal faster, cheaper and better than all the rules Federal bureaucrats can write.